Budget-and-tax impasse threatens economy

WASHINGTON (AP) — With the government heading toward a year-end "fiscal cliff," House Republicans approved a full plate of Bush-era tax cuts Wednesday that they said could help shore up a still-frail national economy. At the same time, the Obama administration warned that threatened budget cuts could send some of America's troops into battle with less training.

For all the action and talk, however, both taxes and spending were deeply enmeshed in campaign politics, with no resolution expected until after the elections.

Democrats are demanding that any compromise to avoid the $110 billion in budget cuts that are scheduled to kick in Jan. 2 include a tax increase on high-income earners. Republicans reject the idea of raising rates on anyone as the economy struggles to recover fully from recession.

"There are five months remaining for Congress to act," acting White House Budget Director Jeff Zients told the House Armed Services Committee. "What is holding us up right now is the Republican refusal to have the top 2 percent pay their fair share."

Deputy Defense Secretary Ashton Carter told the committee that if Congress fails to come up with a compromise, nearly all elements of the military will be affected by cuts mandated by last year's deficit deal. Training would be scaled back and flying hours for Air Force pilots would be reduced. The Navy would buy fewer ships and the Air Force fewer aircraft.

"Some later-deploying units (including some deploying to Afghanistan) could receive less training, especially in the Army and Marine Corps," Carter said. "Under some circumstances, this reduced training could impact their ability to respond to a new contingency, should one occur." Military personnel would be exempt from job cuts, but furloughs might be issued and commissary hours reduced, he said.

Later, Republicans moved to renew the Bush tax cuts for every working American. The cuts will otherwise expire Dec. 31, part of a combination of effects along with major spending cuts that have been characterized as a "fiscal cliff" for the economy. The bill passed by a 256-171 vote. Nineteen Democrats joined with Republicans; retiring Rep. Timothy Johnson of Illinois was the sole Republican to break with his party.

President Barack Obama, in a written statement late Wednesday, said House Republicans had voted to "shower millionaires and billionaires with a $1 trillion tax cut that will inevitably be paid for by gutting investments in critical programs needed to create jobs and strengthen the economy."

There is no expectation that the Democratic-led Senate will even consider the House measure, at least before the elections.

Democrats in the House countered with a plan backed by Obama to extend the tax cuts for all but the highest-earning Americans. Their plan would raise the marginal top tax rate on incomes over $200,000 for individuals and $250,000 for couples from 35 percent to 39.6 percent. It failed, 257-170, with 19 Democrats breaking with Obama.

The dueling votes were more about political messaging three months before the election than a genuine attempt to resolve longstanding differences that threaten to sock every taxpayer in the country with a tax increase if the deadlock isn't broken in a postelection lame duck session. Democrats said Republicans were holding the middle class hostage by insisting on renewing tax cuts for that go to the top 2 percent of earners.

"Let's extend these tax cuts we agree on and then debate what we don't agree on," said No. 2 House Democrat Steny Hoyer of Maryland.

The Bush tax cuts were renewed in their entirety with the support of Obama and many Democrats two years ago as part of a bargain in which Obama also won a Social Security payroll tax cut and an extension of unemployment benefits.

Now, the White House promises Obama will veto the extension if it includes the highest earners. Obama instead supports a plan that passed the Democratic-controlled Senate last week.

Republicans said that measure would hit 1 million small businesses — and more than half of small business income — with a tax increase.

"Two years ago, the president said that stopping the tax hike was the right thing to do for our economy," said House Speaker John Boehner, R-Ohio. "Well, economic growth is worse now, but he's out campaigning for a tax hike on small businesses."

The vote came as gridlock and partisan disputes ensured that pressing issues remain unresolved.

For example, with half the country suffering from the worst drought in decade, it was uncertain whether Congress would pass a disaster relief program. A long-term farm bill was highly unlikely.

And the U.S. Postal Service was defaulting at midnight Wednesday on a $5.5 billion payment due to the Treasury for future postal retirees' health benefits because of congressional inaction.

Legislation on trade, cybersecurity and defense policy weren't getting finished either in the final week before Congress breaks for its five-week vacation.

The divisive politics and recriminations that marked last August's fight over cutting the deficit and raising the nation's budget authority was on full display in the typically bipartisan House Armed Services Committee hearing with Zients and a senior Pentagon official.

Obama and congressional Republicans agreed last summer to $1.2 trillion in spending cuts and tasked a bipartisan congressional panel with coming up with another round of reductions. If it failed, automatic cuts known as sequester would kick in.

All committee members and the two witnesses agreed that sequester was a destructive policy. But none could agree on a solution in a hearing that degenerated into finger-pointing over who was responsible — Obama or Congress — even though Republicans and Democrats voted for the bill and the president signed it.

In the run-up to this year's election, Republicans are using the impending reductions in military spending as a political cudgel against Obama, arguing that the commander in chief is willing to risk the nation's security as he uses the leverage in the budget showdown with Congress. Republican presidential candidate Mitt Romney has echoed GOP lawmakers' criticism.

Democrats counter that Republicans who voted for the cuts are trying to wriggle out of last August's deficit-cutting agreement and must consider tax increases as part of any congressional compromise to stave off spending reductions.

"Sequester defies rational planning. It was designed to be irrational," Carter testified.

Zients outlined further impacts on domestic spending — cuts in the number of FBI agents, food inspectors and border patrol agents. The FAA would be affected and so would the National Weather Service, hampering its ability to forecast hurricanes and tornadoes. Some 16,000 teachers and aides would lose their jobs and 100,000 children would lose their places in Head Start.

Zients said the government, which has planned for contingencies such as shutdowns, would be ready.

But "the right course is not to spend time moving around rocks at the bottom of the cliff to make for a less painful landing. The right course is to avoid driving off the cliff altogether," he said.